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Choosing to purchase life insurance is a big step — one that could provide your loved ones with lasting financial security for the future. Of course, there are many options available. So how do you find the right one for you?
Here's what to know about the available types of permanent life insurance, how they work and when they might make sense for you.
Permanent Life Insurance Defined
Permanent life insurance is designed to last your entire life. These policies have no set expiration date. As long as you pay your premiums, you keep your coverage.
This way you can make sure your beneficiaries receive a death benefit from your policy.
With life insurance policies that aren't permanent, there's a risk they will expire before you die. This means you may end up paying premiums but still not have a life insurance death benefit in place for your loved ones.
Basic Features of Permanent Life Policies
The defining feature of permanent life insurance policies is that they don't expire. You get lifelong insurance coverage as long as you keep paying the premiums. Whether or not the premiums will change over time depends on the type of permanent life insurance you get.
Some permanent life insurance policies also build cash value, which is money you may be able to withdraw or borrow against while you're still alive. The insurer invests a portion of your premium so it has a chance to grow for the future.
If you do take out this money, there are some potential drawbacks. For instance, loans are subject to interest. Additionally, withdrawals are subject to taxes on your earnings above what you paid in premiums. Taking money out also will reduce the cash value and death benefit and could cause the policy to lapse if you can't keep up with future premiums.
What Are the 4 Main Types of Permanent Life Insurance?
There are a few versions of permanent life insurance. They differ based on whether the premiums can change and how they manage cash value. These are the most common types:
1. Whole Life Insurance
Whole life insurance is the oldest and most straightforward version of a permanent life insurance policy. The premiums on these policies stay the same as when you first bought your policy. The cash value grows at a guaranteed fixed rate, which lets you know how much you'll earn every year ahead of time.
2. Universal Life Insurance
Universal life insurance lets you change your insurance premium so that you can pay more in some months than others. Note that you will need to pay enough into the policy to keep up with the insurance costs, or your policy could expire. Your insurer will tell you how much you need to pay to maintain the insurance over time. The cash value of a policy is determined by market interest rates, so the amount earned could change each year.
Universal life policies generally have more risk than whole life policies but are often more flexible.
3. Variable Life Insurance
With variable life insurance, you can invest your cash value in mutual funds. Your return may be higher if your investments do well. If your investments do poorly, your return will be lower, and you could even lose money. The premiums for variable life insurance stay the same over time.
4. Variable Universal Life Insurance
These policies combine features from variable and universal life insurance. You can adjust your premiums each year, like universal life. You then invest your cash value in mutual funds, like variable life.
How Does Permanent Life Insurance Work?
Permanent life insurance follows the same general setup as any life insurance policy. You first decide what type of permanent life insurance policy you want to buy, the death benefit amount and any extra benefits you want to include (known as riders). Then, you submit an application.
The insurance company reviews your application. As part of the process, they could ask you to go through medical underwriting. They may ask you questions about your health, collect blood and urine for lab testing, or request that you have a physical exam.
Based on those results, they will tell you if you qualify and at what cost. You can then decide if you want to accept the offer. If you do, then you just need to keep paying the premiums to keep your permanent coverage. If your policy offers cash value, this will build over time as you pay your premiums.
What Is the Difference Between Term & Permanent Life Insurance?
Term life insurance is temporary life insurance. It states exactly how long the policy lasts, often between 10 and 30 years. If you pass away during that time, the insurance policy will pay your beneficiaries the death benefit. If you outlive the term without renewing, your coverage expires. If you do reapply, the premiums are likely to be higher than when you first applied because you'll be older. Term life insurance also does not offer cash value.
The trade-off for the temporary nature of the policy is that term life insurance typically costs less than permanent life insurance. It can be useful for times when you need a large amount of coverage for a short term, like when you're taking care of very young children or paying off a mortgage. Permanent life insurance can be a better fit for long-term needs, like leaving an inheritance.
Advantages of Permanent Life Insurance
Several potential benefits are associated with permanent life insurance policies. Here are some of the advantages to consider when weighing your options:
- Policies don't expire. As long as you make your premium payments, you keep your permanent life insurance coverage. These policies are a way to set up coverage that you won't outlive.
- You may be able to keep your premium from increasing. Some types of permanent life insurance, like whole life, keep the same premiums over time. You don't have to worry about costs suddenly going up.
- Policies can build cash value. A permanent life insurance policy can build cash value whereas temporary term policies do not.
- Tax benefits exist for cash value growth. Life insurance cash value grows tax-deferred. This means as long as you keep the money in your policy, you don't owe income taxes on the gains. In addition, if you take out your cash value gains through a policy loan, you also don't owe income taxes (though the insurer will charge interest on your loan).
- You might be able to access the death benefit while living. Permanent life insurance policies may offer ways to access the death benefit while you're still alive. For example, you could set up a policy that would pay out part of the death benefit to help cover your long-term care expenses in a nursing home.
Disadvantages of Permanent Life Insurance
While permanent life insurance can benefit many situations, it might not be the right fit for everyone's needs. Here are a few potential disadvantages:
- Higher premiums. A permanent policy will charge significantly more at first than a term policy with the same death benefit.
- More complex guidelines. Permanent life insurance often has more rules, features and fees than term policies.
- Limited investment flexibility. With whole life and universal life, you cannot change how to invest your cash value. While you can choose which investment funds to use with variable and variable universal life, your options are limited to what's available with the insurer.
- Drawbacks for using cash value. If you borrow or withdraw your cash value, it could lead to you owing interest or taxes. This can also reduce your death benefit.
How Much Does Permanent Life Insurance Cost?
The cost of permanent life insurance depends on several factors:
- The size of your death benefit. Larger policies cost more.
- The type of permanent life insurance.
- Your age when you apply. Life insurance gets more expensive as you get older.
- Whether you have any pre-existing health conditions. These can increase the cost.
- Whether you buy any extra benefits to your policy through riders.
- The number of premium payments you plan on making. You can spread the cost of your policy over many smaller premium payments, including payments for life. Alternatively, you could pay off the policy by making larger but fewer payments.
To see how much permanent life insurance would cost for your unique situation, you can request a quote.
Who Should Consider Permanent Life Insurance?
Permanent life insurance could make sense for insurance goals that are long-term or never end. For example, you could allocate money to pay for your final expenses. In the end, this is a need we all share. A permanent life insurance policy will help cover these costs — whether you live another 20 years or 100 years. Permanent life insurance could also help you leave an inheritance for your loved ones, provide a donation to charity or ensure a family member who requires ongoing special care will receive that assistance.
Let's imagine that you bought a large term life insurance policy when your kids were young, but now it's about to expire. You could decide to buy a permanent policy. Depending on the amount you choose, it could be enough to cover your final expenses and leave a small inheritance for your children. Then, once your permanent policy is in place, your life insurance coverage will remain set for life as long as you pay the premiums.
For younger people, permanent life insurance could help you lock in a low rate for the rest of your life. The cash value also builds for the future. You could borrow against the cash value to make a down payment on a house, pay for college expenses for a family member and more.
Are you looking for ways to prepare for the future? If you don't have children, but plan to start a family someday, permanent life insurance could be a good fit — as the policy would remain in place as your children grow, as long as you pay the premiums.
Since permanent life insurance is typically more expensive than term, consider whether you have the budget to afford the premiums. Make sure the death benefit is large enough to fully cover your life insurance needs. If you can only do so with more affordable term life insurance, that may be the way to go.
Term policies could give you the option to convert to permanent coverage later without a medical exam. That way you could still switch to permanent life insurance in the future.1
How to Choose the Right Permanent Life Insurance
Finding the right permanent life insurance depends on your financial goals and preferences. Someone who wants to keep things safe and predictable may prefer to buy a whole life policy. The premiums won't change, and the policyholder can foresee how their cash value will grow over time. But someone who wants budget flexibility may prefer the adjustable premiums on universal life even though the cash value growth is less predictable.
Since permanent life insurance is more complicated than term life insurance, it may be worth speaking with a financial professional about these policies. They can help you compare the different options and run the numbers. For example, they can show how much your cash value would grow in a whole life policy versus a universal policy. With their help, you'll be able to definitively answer the question "Should I get permanent life insurance?"
If you want a long-term solution for your insurance, permanent life insurance could be a good fit for your needs. Getting your feet wet in the world of life insurance might feel a little intimidating, but jumping in (and learning more about the ins and outs of each insurance type) could help you learn how to swim.
Footnotes
- Increases in coverage are subject to new underwriting
